How fund investors reacted during ‘Red October’

During October’s market turmoil, fund investors dumped bonds and tried to buy the dip’ in US shares.

Funds and Investment Trusts December 10, 2018 by Tom Bailey

October of this year earned the moniker ‘Red October’, thanks to the heavy selling that engulfed markets around the world. With fear over the pace of US interest rates rises pushing US bond yields to an eight-year high, investors dumped equities, including the one seemingly unstoppable Faang tech names, wiping out yearly gains.

During such market chaos, how did UK retail investors react?

According to the Investment Association’s monthly statistics, net retail sales for UK recognised funds was negative, with net outflows totalling £1.6 billion. In comparison, funds saw a net inflow of £5.3 billion in October of 2017.

However, while the month of October will be remembered more for the damage it did to equities (damage that markets are still struggling to recover from), UK retail investors were heavy sellers of bonds, rather than equities. Net outflows from fixed income funds totalled £1.6 billion.

As Chris Cummings, chief executive of the Investment Association, notes: “With the era of quantitative easing anticipated to end in both the US and Europe, fixed income funds have seen their appeal dented.”

In contrast, most equity fund sectors saw more money invested than withdrawn throughout the month, suggesting that many UK investors saw heavy selling as a chance to “buy the dip”. As Jason Hollands, managing director of Tilney Bestinvest notes: “With equity inflows actually picking up on the prior month, perhaps suggesting some bargain hunting on the back of the sell-off.”

In particular, North America equity funds saw the largest sales, with net inflows of £122 million, above its 12-month average of £116 million. Hollands adds: “Notably, US equity funds proved most popular: the US was at the epicentre of the sell-off with FANG stocks getting hit particular hard.”

However, with markets still taking a beating through November and December, such attempts to “buy the dip” may not have made the best choice, at least viewed on a short-term basis. As George Lagarias, chief economist at Mazars notes: “The failure of the S&P 500 to break through some key technical levels in a period where it traditionally rallies, could dampen trading expectations for the remainder of a year where “buying the dip”, the universal sign of a bull market, did not work.”

Meanwhile, UK-focused equity funds continued to see heavy outflows, albeit it slighter lower than the average net retail sales for previous 12 months.

As Laura Suter, personal finance analyst at AJ Bell, points out: “Investors pulled another £214 million from UK equity funds in the month, continuing a year of heavy outflows for the funds – now topping £10.8 billion.”

However, she argues, this may have been a good move on the part of investors. She says: “Only two funds in the UK Equity Income sector have delivered a positive return this year – Schroder Income and Schroder Income Maximiser – all others have handed investors losses.

“Meanwhile, in the IA UK All Companies sector – the largest sector by far – just seven funds have delivered a positive return to investors, with the remaining 200 all delivering a loss. This is not a complete shock as the FTSE 100 is down 10% in the year so far, while the FTSE 250 is down 12%.”

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